Easily the most startling number I've seen in ages comes from this article in the May 14 Wall Street Journal. The article is behind a paywall, and, in fact, the startling number is buried, so I'll go directly to it:

According to forthcoming research from Oliver Wyman, only 16 cents of every dollar of auto insurance premium directly benefits claimants through repairs, physical therapy and so on.

16 cents! 

I certainly knew about all the other aspects of insurance that draw on that dollar of premium and understand all the expenses associated with distribution, underwriting and the complex mechanics of the claims process. But I've been operating based on the rule of thumb, as reflected in this article, that about 60 cents of every dollar goes to claimants.

Even that number struck me as far too low, and I've been arguing for years, such as in this article, that the percentage of premium returned to customers needs to increase greatly. We've explored at length how insurtech can raise that percentage both through helping customers reduce losses and by slashing expenses.

Now I find that, for auto insurance, I was wildly optimistic about where we stand now. It's a good thing for the industry that auto insurance is required. Otherwise, who would buy something with a negative 84% return?

I understand all about peace of mind and about everything the industry has to do that lies behind that, but...16 cents?

Have a great week.

Paul Carroll
Editor in Chief

Sometimes you’re the disruptor. Sometimes you’re the disrupted. In an 85-page missive, the California Supreme Court, in Dynamex Operations West vs. Superior Court (2018), S222732, unanimously left no doubt that for wage and hour purposes fewer individuals will be independent contractors. Commentators nationwide were quick to opine that this was a major blow to the gig economy. The new test for employment status, the “ABC” test, was set forth by the court in its April 30 decision. Basically, the test uses three criteria. Per the court: “Under this test, a worker is properly considered an independent contractor to whom a wage order does not apply only if the hiring entity establishes: (A) that the worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of such work and in fact; (B) that the worker performs work that is outside the usual course of the hiring entity’s business; and (C) that the worker is customarily engaged in an independently established trade, occupation or business of the same nature as the work performed for the hiring entity.” The second criterion, “B,” that the worker performs work that is outside the usual course of the hiring entity’s business, will likely prove to be the most disruptive. While each case depends on the facts to a degree, establishing the hiring entity’s business is not a nuanced inquiry. The burden of proof is on the employer to prove independent contractor status and that each of the ABC standards are met. Failure to prove any element means the worker is an employee. See also: The State of Workers’ Compensation   The issue of employment status within the workers’ compensation system, however, was not before the court in Dynamex. Thus, the court’s prior holding in S. G. Borello & Sons, Inc. v. Department of Industrial Relations (1989) 48 Cal.3d 341 remains the applicable standard for resolving whether someone is an employee for workers’ compensation purposes. The court in Dynamex acknowledged that, “…because the Borello standard itself emphasizes the primacy of statutory purpose in resolving the employee or independent contractor question, when different statutory schemes have been enacted for different purposes, it is possible under Borello that a worker may properly be considered an employee with reference to one statute but not another.” Under Borello, the Supreme Court stated that the determination of employment status cannot be decided absent consideration of the remedial statutory purpose of the workers’ compensation laws. The court then acknowledged as factors the primary test of right of necessary control over the manner and means used, whether the task is part of the principal's regular business and discharge is terminable at will, whether the worker has a distinct business with equipment or employees that is subject to profit or loss, the skill and supervision required, mode of payment, bargaining position of the parties and their intent. [As summarized in Ware v. Workers' Comp. Appeals Bd., 92 Cal.Rptr.2d 744, 78 Cal.App.4th 508, 511 (Cal. App., 1999.)] The court in Borello also stated, citing previous authority, that “…the individual factors cannot be applied mechanically as separate tests; they are intertwined, and their weight depends often on particular combinations.” It is difficult, however, to articulate the basic public policy rationale supporting the idea that there is a significantly different “statutory purpose” between enforcement of payment of wages to employees and providing those employees the benefits necessary to recover from an injury arising out of and in the course of employment. Certainly, the statutes address different issues. That is not the same as saying that in one case (payment of wages) there should be a more expansive definition of “employee” than under the workers’ compensation laws. That is particularly the case when one considers that during the time an injured worker is recovering from the effects of his or her injury, temporary disability benefits are provided to make up for lost wages. In other words, isn’t the statutory purpose behind making certain employees receive the wages to which they are entitled just as pressing whether the issue is protecting someone from an unscrupulous hirer or whether it is to protect the employees from the loss of wages due to a workplace injury? Yet the court is making a distinction in Dynamex. It would seem that public policy dictates the standard should be the same – regardless of what that standard is. It will be left either to the courts to extend the ABC test to workers’ compensation in the appropriate case or require the legislature to intervene and harmonize these tests. The Dynamex decision will lead to considerable litigation. Although it may be anticipated that a new wave of wage and hour claims are in the process of being prepared, it is premature to immediately assume that independent contractors have en masse been transformed into employees. Any business using independent contractors, however, should already be assessing how its operations are affected by the ABC test and make the appropriate adjustments. One of the many unanswered questions for hirers is what happens when an individual is considered an “employee” of multiple employers? See also: 25 Axioms Of Medical Care In The Workers Compensation System   For workers’ compensation insurers, there is the added confusion that an employee for wage and hour purposes may not be an employee for workers’ compensation purposes, meaning that the “Dynamex” payroll will be larger than the “Borello” payroll. There is also the possibility that a worker will not be sufficiently attuned to these legal maxims and file a workers’ compensation claim. In such instances, the reconciliation of Dynamex and Borello will be, in the first instance, up to the Workers’ Compensation Appeals Board. Today, there are far more questions than answers in the wake of the Dynamex decision. The speed with which these questions get answered will depend more on the legislature than the courts. But, in today’s innovative economy the intructions are clear: Disrupt, adapt, repeat.

Background Mobile devices, like smartphones, can be used as "terminals" of IoT networks because they are equipped with numerous sensors that can record the environment. Smartphones nowadays are a commodity, almost always carried by their users, including when they are drivers or passengers of vehicles. Therefore, they can be used as automatic crash notification IoT devices, with the following important limitations:

1. The sensors in personal mobile devices are designed to address specific user needs, like gaming. They have very good specifications on their sensitivity and their resolution, but they have minimum range: The best accelerometer in a mobile phone can measure acceleration values of ±8g, when the forces involved in a car accident can create a negative acceleration of 100g. These sensors cannot record an accident. They can only POSSIBLY identify the beginning of an accident.
2. Any unusual sensor readings, a phenomenon common on cell phones, can be misinterpreted as the POSSIBILITY of an accident and initiate an ALARM dispatch procedure, when the phenomena most likely are FALSE ALARMS (also noted as false positives). The sheer amount of such FALSE ALARMS will create a distributed denial of service (DDoS) to the public safety answering point (PSAP).
3. In the case of a severe accident, where the passengers of the involved vehicle(s) will not be able to ask for help, it is almost certain that any phone in the vehicle(s) will be not operational.

For the above reasons it is obvious that smartphones lack the functionality and reliability required for a life-depending device because they can not monitor a severe traffic accident through its full timeline and cannot issue a VERIFIED alarm. On the other hand, a smartphone using its sensors can recognize the forthcoming of an accident from the unusual change of its kinetic state and pass this critical (but not definite) information to an external monitoring system before it is destroyed by the crash. A solution, called PODIS, is using this approach. A distress signal will leave the phone in time, before its possible destruction, and cancel the alarm transparently to the PSAP if the phone remained operational after the suspicious event. The system is issuing fail-safe crash notifications and is monitoring not only the driver of a vehicle but also the passengers of cars, professional vehicles, public transport and cyclists This is the simple operating principle of the PODIS system. PODiS (POst DIstress Signal) System description A cloud-based client-server system, where the client is an application installed in a mobile device (smartphone or tablet) and the server is a virtual private cloud (VPC) of processing and database servers, load balancers, security devices, etc. Monitoring stage The PODIS client is reading the mobile device sensors in a high frequency rate (minimum 50 Hz) and is calculating its kinetic state by fusing the readings of the sensors. It is then predicting the next kinetic state of the mobile device by using a specialized signal processing algorithm. The client is comparing the difference between the predicted and the current state against a predefined threshold in every single operating cycle. See also: 7 Imperatives for Moving Into the Cloud   Provisional alarm (Client side) If the difference between the predicted and the actual current kinetic state exceeds a threshold, a provisional flag is raised by the client and a provisional alarm (PA) is transmitted to the cloud server. The client is capable of transmitting a complete PA in milliseconds, well before the main vehicle parts and the client itself start to destruct. The latter typically takes in the range of 150 ms. Provisional alarm (Server side) When a PA is received by the cloud server, all received data (including user ID, location coordinates and timestamps) are recorded as a predicted event, and the server puts the specific client under supervision and starts monitoring for its next signal. False alarm (Client side) The client is checking in pre-defined intervals, for example every 5 seconds, if the PA flag is raised; if it is, the client transmits to the server a false alarm signal and sets off the flag. In case the PA flag is ON, the client is keeping pushing the kinetic and the location data to the server(s) for a short time for the server to check if the client survived from a severe accident (very unlikely). False alarm (Server side) When a PA signal is received, the server is waiting for a false alarm (FA) signal from the specific client for a predefined period, for instance 20 seconds, and if an FA is received then the event will be recorded internally as a false alarm with no further action. Real alarm (Server side only) If no false alarm is received from a client that raised a PA within a predefined period, then the server is raising a verified alarm ticket with all available data to the connected PSAP. Unverified accident (Server side) If the server receives data showing very little kinetic activity and short distance movement after a PA, then a non-verified alarm ticket is pushed to PSAP for further investigation. Threshold processing method Each smartphone, which for Android means 24,000 distinct devices from more than 1,000 different manufacturers, has its own characteristics and specifications. Thus, the same sensor from a certain manufacturer does not have the same characteristics in different smartphone models. Moreover, each individual driver has his/her own driving behavior. For example, a hard braking can be an emergency sign for one driver, while it can be an everyday driving practice for someone else. The server side is using a self-learning system that, at a very high level, is recording the PA values for each individual smartphone model and every single user when a PA is followed by a FA, and it adjusts accordingly the specific threshold. The new threshold value is pushed to the server for the record of the specific client. The system is effective: It will take just a few driving hours to eliminate the FA for a newly registered user if he/she is using a new smartphone model. See also: Profiles in the Customer Experience   Energy consumption and data traffic The client is running in the background as a service, only when it is in a moving vehicle with limited battery consumption. The maximum flow of mobile data is 2.6 MB per day for 24 hours driving use. NB: The above description is a simplified version of the principles behind the system. The system is already in use by insurers as a running service, while successful extended pilots have been performed around the world. The system and the method are patented: USPTO patent No. 9,758,120.

Political risk is a key concern for participants in the public-private partnership (P3) market in the U.S. and Canada. Large infrastructure projects generally, and P3s in particular, can serve as lightning rods in debates surrounding investment decisions using public funds. Due in part to the potentially higher up-front price of delivering an infrastructure asset through a P3 or the perceived loss of public control of an infrastructure asset, P3s can generate significant opposition – ultimately ending with the cancellation of a project for political reasons and no contract to award. Though the risk of project cancellation is considered a business risk and is not insurable, this does not mean it is something risk advisers should ignore. To help prospective bidders on these projects manage and assess risks, it is important to look at the readiness and friendliness of a company. Readiness is a measure of the legal and regulatory climate of a given state or province as it relates to P3 procurement, while friendliness is a measure of the public sector’s willingness and drive to successfully procure a P3. Within the readiness score are sub-factors, such as whether the state or province has legislation authorizing the use of P3s, whether P3s can be used for both civil and social infrastructure projects and whether the state or province has an office dedicated to assessing and procuring P3 projects. Within the friendliness score are sub-factors such as whether the state or province is in an election year, whether the state or province has experience procuring P3s and whether there is organized opposition to P3s. See also: Top 10 Claims Trends That Will Affect 2018 Aon’s latest Public-Private Partnership Pursuit Risk and Opportunity Index (P3-Pro), takes a deeper look at these two scores, and the results provided valuable key learnings. States and provinces that have relatively long track records of successful P3 procurements and institutions established to bring certainty to the procurement process topped the list. In the U.S., the top states for certainty as it relates to successful P3 procurement were Colorado and Virginia. Both these states have experience procuring P3s and each had two major projects successfully reach financial close in 2017. Both of these states also have offices dedicated to the assessment of whether the P3 model is in the public’s best interest. These offices lend a given procurement an increased sense of legitimacy and show that the public sector has thought about the project and is not simply looking at a P3 as a source of free money. P3 Trends Overall, last year saw a general decline in certainty across the U.S. Much of this was due to coming gubernatorial elections in 36 states. The potential change in executive can foster uncertainty for a project, particularly if the project becomes a campaign issue, as happened in the British Columbia elections in 2017. Additionally, last year saw the expiration of authorizing legislation in states that have had significant experience with P3s, particularly Texas. Texas has completed multiple highway P3s over the past decade, but due in part to public opposition to continued development of toll highways, the legislature allowed the legislation authorizing Regional Mobility Authorities to pursue P3s to lapse. When looking at which states currently have large projects in procurement, there are some continuing projects in states that scored in the middle of the pack on the index. For example, Alabama is in the process of procuring the $2 billion I-10 Mobile River Bridge and Bayway project but falls into the “less certain” category, in part due to its inexperience in procuring a P3 project. While Michigan is in the process of procuring the $650 million I-75 Modernization project, the state also falls into the “less certain” category due to its lack of explicit P3 authorizing legislation. See also: What if Amazon Entered Insurance?   Canada has historically been less dramatic than the U.S. when it comes to P3s. However, 2017 was a little different. A new government took power in the summer and subsequently canceled the George Massey Tunnel Replacement project. Aside from the turbulence in British Columbia, many provinces in Canada scored fairly high in the index. Ontario, which for the last three years of P3-Pro’s publication secured the top scoring jurisdiction in North America. In terms of certainty of reaching financial close once a project begins procurement, Ontario has been the P3 leader in North America for some time. The province has successfully reached financial close on dozens of projects and has a robust pipeline of more than 20 projects. The pursuit of a P3 can be a risky decision. Once the pursuit begins, there is no guarantee that the project will actually be awarded. Though there has been some progress in recent years to add certainty to the P3 process, with more states passing enabling legislation and getting experience in this delivery model, political considerations remain a key concern.

According to Maersk, “Everything that can be digitized will be digitized,” and there is no doubt that the world of shipping is undergoing a digital revolution. Marine insurers cannot afford to be left behind. From vessel movement data to port statistics and engine diagnostics and data, the Internet of Things (IoT) empowers insurers to segment and optimize their existing portfolio, identify new sources of risk and opportunity and offer truly connected policies. Having operated in the IoT space since 2012, our (Concirrus’) turning point came in 2016, when we were approached by a marine insurer, which was interested to know whether data and IoT technology could be applied to commercial marine insurance. Unlikely? Perhaps, but we could see that the maritime industry was bursting with data that, with some clever technology, could be repurposed, to offer invaluable insights to marine insurers. Having now spent the best part of 18 months living and breathing marine insurance, my team and I have developed a view on where the marine insurance industry is going, and it is a far cry from the traditional market model that is currently under so much pressure. A new marine model There are three primary characteristics in the current market. The first is rating factors. For the past 200 years, marine policies have been rated on risk, using a standard set of rating factors - vessel type, age, place of build, flag, tonnage, etc. See also: How Is Marine the Heart of Insurtech?   The second is policy type. In the current environment, policies are global in nature, with wide coverage and few exclusions. Finally, placement, which is managed primarily via brokers using paper as their main form of conveying risk and getting contracts and documents to and from customers. The way insurers go about managing those three characteristics is undergoing a seismic shift. Rating factors. It’s now clear that demographics alone are not an accurate indicator of risk. Add behavior to demographics, and you get a far better picture. We know this intuitively. For example, if we gather 10 people of any demographic pool, we know that, while they are all equal on paper, their driving styles vary dramatically. We have also seen this proven in other areas of insurance. This approach holds true for marine insurance, too, but how do we get there? The answer is the combination of vast quantities of data, combined with machine learning algorithms and interpreted with insurance domain expertise. It is entirely possible to find out which behaviors correlate to claims, and the behaviors that cause claims. Because these are causation factors, they can be used as lead-indicators, meaning the insurer can see the claim before it’s happened, leaving the insurer to potentially intercept, mitigate and reduce the quantum of the claim overall. Policy type. Not everybody might need the global policies that are provided today, which means that, even in a soft market, some risks are overpriced and some underpriced. There is a market for policies that are "fractional" and provide elastic coverage. A simple example of this is war zone coverage. Today, this requires the customer to notify the broker, who, in turn, notifies the insurer that war zone coverage is required. In the future (well, actually, it’s possible today), this process can be managed automatically by placing an IoT device on the vessel to detect an incursion into a war zone -- with insurance technology that automatically turns on the coverage, collects the premium and issues the appropriate documentation to the customer. This zonal type of insurance also means that specialist insurers can narrow their focus to a given set of perils, whether that be geography or a specific aspect of the marine insurance spectrum. A zonal approach also means that insurers can assess their exposures and tightly tailor their reinsurance program. With the current competitive pricing climate, it is widely recognized that the marine customers, who have invested heavily in safety technology, are not reaping the requisite insurance benefits, whereas other fleets are paying too little. That balance needs to be addressed. Placement. This is last aspect of change that I see as being key to unlocking the greatest benefits. There is undoubtedly a role for a real-time placement platform for commercial risks, such as the Lloyds PPL and other solutions from EY, B3i, etc. Compare these with the current, paper-based and manually intensive process; real-time placement will allow the insurance market to operate much like the stock market does today, with much greater visibility and speed. It’s hard to believe (or maybe it’s not), but it’s been said that by 11 am on the first day of trading for the year, the London stock market will have processed more transactions than the Lloyd’s market will in an entire year of operation. We need only to look to other markets to see how real-time trading platforms have enabled an entirely new business model. One interesting analog of a market changed by a real-time placement platform is that of the betting industry. While it has always been possible to bet on who might win the Masters golf tournament, it is now possible to place a bet in real time on whether Tiger Woods might hit the next shot into the water. This type of bet is only possible because the technology allows the odds to be calculated, priced and placed in real time. See also: Global Trend Map No. 7: Internet of Things   Given that is estimated that only 10% of the world’s risks are currently insured, micro bets may offer direct insight into how the insurance market could work, when you combine behavioral technology, fractional policies and a real-time placement platform. Our belief is that this new operating model would open large swaths of the market, which are currently uninsured, to innovative insurance products. A major concern for insurers and reinsurers is the need to assess and forecast exposures and losses. Events such as the Tianjin explosion and hurricanes Harvey, Irma and Maria challenged insurers to understand accumulations and losses and in some cases caught them by surprise. The latest IoT technology will allow insurers, reinsurers and businesses actively managing risks to monitor their assets, in real time, and be more prepared for events – such as conflicts, natural disasters and machinery failure. The Internet of Things and connected technologies mean that mobile devices and sensors offer up constant streams of data, and, within this data, lies insight into the behaviors and risks associated with that asset. At a basic level, this means a business can be aware of which mobile assets (e.g. vessels and cargo) are in what location at any time. By cross-referencing connected data sets, the total monetary value of those vessels and freight units can be determined automatically. Using algorithmic technology, the latest technology can take things a step further. For example, companies can act whenever total exposure levels (the total insured value of its assets) reach a certain threshold, within a geographical zone. Today’s best-of-breed platforms, supported by data science teams, allow users to extract and unlock behavioral insight from their assets, leading to the creation of better products, pricing and profits.

Anyone who has founded a business appreciates how much time, effort and expertise is required to make it successful. Establishing a captive insurance company is no different; you might be tempted to throw up your hands and forgo it. After all, insurance is not your core competency. That could be a mistake. The captive insurance industry has matured sufficiently to the point that there are now many capable service providers that can help you analyze your insurance needs, launch and license your captive insurance company, arrange for reinsurance and manage the captive. When implementing a captive insurance plan, it is critical to focus on both its appropriate establishment and its continuing operation; these are two distinct areas of expertise. I generally recommend that businesses engage the services of an adviser to help launch the captive insurance company and another to manage its operations. See also: The Ten Questions of Captive Insurance, Part 3  I recommend retaining a lawyer who is well-versed in captive insurance to engage the services of an independent, fully credentialed underwriter and an independent, fully credentialed, third-party actuary. The underwriter will evaluate the risk inherent in your business and identify areas that should be insured. The actuary will price the risk that will be considered for your captive insurance company to provide coverage for your underlying business. Together, they will identify the coverage that can be underwritten by your own captive insurance company and how much in premiums you can pay for such coverage. Armed with that information, your attorney, accountant or advisers should be able to determine whether it makes sense to proceed with a captive insurance company. Once that determination is made, your adviser will likely work with a captive insurance service provider or insurance actuary to design insurance policies that cover key risks in your business. An important decision to make is the jurisdiction in which your captive insurance company will be licensed. Jurisdictions vary in their costs, the time it takes to form your captive and regulatory requirements. The jurisdiction that will ultimately be chosen should be the result of a detailed discussion with your attorney and captive manager. Once the captive is established, you would typically sign a long-term contract with a captive manager to handle its day-to-day operations. As a business owner, you’re aware of the risk involved in any long-term contract and the amount of due diligence necessary before entering into any such arrangement. This is where the services of an experienced professional advisor can be invaluable.

A litigation analysis found that lawyers used telephone negotiation in 72% of the cases studied, resulting in settlement only 35% of the time. That means that phone negotiation sessions or other processes had to be used multiple times to get to settlement. We can assume that repetition resulted in a loss of time and money for the participants. In contrast, mediation resulted in resolution 100% of the time in the studied cases. Yet, lawyers used mediation in only 2% of the cases. Here are some of the problems with telephone negotiations: Lack of Visual Information You can’t share documents or other visuals over the phone. Even if all participants to the call are supposed to have the documents in their possession, you can’t be positive they are actually looking at a document, even if they say they are, or if it’s the right one. Body language provides visual cues to the negotiator about how things are going. Facial expressions can show surprise, anger or anxiety as parties exchange information. You can’t look someone in the eye over the phone. Without the visuals, it may be easier for people to dissemble. Likewise, over the phone you are unable to enhance your own message with gestures or other body language. In mediation, the mediator interprets participants’ body language to better facilitate negotiation. See also: Work Comp: Mediation or an ‘Informal’?   Getting Negotiators to Pay Attention Listening is hard work. When negotiators use the phone, they may not be focused. There could be active interference, e.g., flashing lights and text messages on the phone, incoming emails, other notifications from multiple devices or co-workers coming by. Even without those distractions, people’s attention may drift. Technology Can Get In the Way What about using Facetime, WhatsApp, Skype or another video call utility? Theoretically, this could overcome some of the deficits of voice-only negotiation. On the other hand, have you seen the hilarious Tripp & Tyler video about video conference calls? Even when the technology is working perfectly, body language can be difficult to interpret or convey through video. It's true that video conferencing might be helpful during mediation if, for example, the adjuster or injured worker is in another state and unable to travel to the mediation, assuming the principal negotiators are physically present. See also: Tips on Mediation in Workers’ Comp  

Every industry wants to improve the experiences it provides to customers. And perhaps more than any other area of business, companies are looking to other industries for examples, case studies and lessons learned. Recent personal experiences with three industries highlighted how experiences have changed and how different they can be. In a period of one week, I was engaged in transactions with a car dealer, a mobile phone company and an insurance company. Here were the scenarios and some observations – especially what it means for the insurance industry. New Car Purchase Situation: My daughter purchased her first new car The first reaction that most people might have it that this was a frustrating, poor experience. That, in fact, was not the case. The sales person was knowledgeable and helpful. The auto industry figured out long ago how to simplify the purchase options and price haggling. Gone are the days of walking in with printouts of the dealer cost for every option/feature and using that info to determine which features can be combined to create the right, affordable vehicle for each person. Also gone are the days of endless back and forth negotiations – will you reduce the price by $500 if we downgrade the stereo package? The proposal from the dealer had four line items and a simple bottom line price. Easy peasy, lemon squeezy. It still took some time to get through all the paperwork – much room for improvement there. But overall, it was a relatively painless, mostly pleasant experience. See also: 4 Insurers’ Great Customer Experiences   Mobile Phone Upgrade Situation: A family member swapped an old iPhone for a newer iPhone The phone companies MUST get it together. Maybe there are some that are better than my provider, but I couldn’t say from personal experience. (In case you’re wondering why I don’t change, I’ve heard too many complaints from the customers of other providers.) But, my provider’s plans are so complicated and obtuse that it’s a nightmare to try to understand what I’m paying for. And, if that’s not enough, the plans are frequently changing. It took almost three hours in the store to swap an old phone for a new one. And that does not count the time spent at home activating the new phone and downloading all the apps and data from the cloud. One of the culprits is the “family plan.” Like many families, my 20-something “kids” are still on my plan. By the time all the various devices (phones, tablets, telematics devices, etc.) are tabulated, there are many “lines” that are part of the plan. And every time you call the provider or go into a store, they have a “new plan” that will be better for you. If you are really a glutton for punishment, choose the option of a full paper statement every month. It can easily be 50-plus pages. Seriously? It is way past time to think about the customer experience. First-Time Insurance Buyer Situation: Purchase of a new auto insurance policy My daughter called the insurance company to get insurance for the new car. The agent recognized that it was her first time buying insurance and asked if she wanted to understand the coverages. She said yes, and he proceeded to carefully explain every coverage and the options she had, which was greatly appreciated. In addition, the agent discovered that she just moved into an apartment. She thought she had purchased renter’s insurance through the complex, but he helped her understand that the coverage was only for the structure, so he sold her an inexpensive policy to cover the contents. Plus, with two policies, she got a discount on her auto insurance that almost made the renter’s insurance premium a wash. She walked away with a positive view of the insurance company. Key Takeaways One thing these three situations have in common is that the experience was all delivered primarily through humans – not through digital self-service. In each case, the transaction was heavily aided by digital systems, with the agents/salespersons using tablets or desktop computers. All three products were complex, which made it preferable, if not necessary, to have a human intermediary explain and discuss options with the customer. Also, even with the easy car purchase, maybe with the insurance purchase, but especially with the mobile phone purchase, there are opportunities to simplify the product and the process. See also: Who Controls Your Customer Experience?   From an insurance perspective, this example demonstrates why I have a contrarian view about agents in general. I believe that agents, brokers, advisors, and other human intermediaries will be around insurance for a long time in most lines of business. Auto insurance is deemed a commodity, and many will expect sales to all be conducted by digital self-service – the agents will be gone. But even in that line, there will be a role for agents for some time to come. More and more people will purchase auto insurance, term life insurance, renter’s insurance and others online over time, but it may be a long time before we reach the tipping point where more policies are sold online than through agents. This does not mean that insurers and agents should be complacent. In fact, an aggressive plan for digital transformation for both groups is mandatory to remain relevant and competitive in the future.

Today, we continue our journey through our dedicated regional profiles, in which we explore key insurance/insurtech trends continent by continent. In Part I of our profile for North America, we reviewed our general statistics for the region, which we gathered in the course of our Global Trend Map (download the full thing here), and identified several qualitative themes (of which we explored the first two):

1. Insurers’ renewed focus on their primary underwriting business in the face of low interest rates and impending insurtech disruption
2. The rise of the "new consumer" and how this is changing the insurer-customer relationship
3. Customer-centricity as the prime mover of distribution and product
4. The impact of legacy systems and regulation on (re)insurers’ innovation and transformation efforts
5. How insurers are to unlock new sources of growth in a mature market

Here we explore themes 3 and 4 in discussion with our two in-region influencers:

• Chicago-based Stephen Applebaum, managing partner at Insurance Solutions Group
• Boston-based Matthew Josefowicz, CEO at Novarica

3. A ‘New Insurance’ for the ‘New Consumer’ In Part 1,  we identified the rise of the new consumer, who expects and seeks out on-demand digital interactions, as representing both a challenge and an opportunity for incumbent insurers. It is not enough just to focus on customer-centricity in a broad sense. If, as we have suggested across this content series, distribution disruption is the root of customer disruption, it is on this ground that insurers must stand and fight. This makes distribution into a key axis of insurer response as carriers seek to prevail over their new-age competitors. It unsurprising, then, that we discern a fresh strategic focus on distribution from our North American correspondents: "Every major, every top-tier P&C carrier is actively developing multi-channel communication capabilities and multi-channel distribution capabilities," states Stephen Applebaum, managing partner at Insurance Solutions Group. This is far easier said than done, given the legacy constraints that insurers find themselves under, which we explore in the next chapter. "Insurers’ infrastructure, which has been built over literally hundreds of years, never anticipated having multiple channels of communication to support, so insurers are scrambling to learn how to do that," Applebaum continues. ‘In the past, it was a paper-based business, and the postal service was the method of communication, or the agent was the method of communication. The role of the agent is dwindling, as is that of the post office in P&C insurance." There is a risk that insurers attempt to become all things to all people from a distribution perspective, dissipating their energies, and the task of transforming distribution will certainly be a much more manageable one if they can focus their efforts on what really works for their specific customers and products. "Different segments of the market and different products imply different distribution methodologies – so it’s a matter of dealing with increasing complexity," summarizes Novarica's Matthew Josefowicz. While distribution is arguably the centerpiece, the heightened demands of 21st-century consumers in fact apply to the entire customer journey from start to finish. It is not enough to give customers the option of researching, buying and accessing their products via digital channels in addition to physical ones – the entire interaction must be as frictionless as possible, and all of this irrespective of access device. Applebaum gives us some context around what this means for insurers: "Whether it’s filing a claim through an app on their phone or receiving a claim payment electronically to an app or to their bank account, or even just exchanging information like adding another vehicle to the policy, today’s consumers don’t want to have to make phone calls, and they don’t want to send emails. They basically just want to exchange digital information as quickly and efficiently as possible." Encouragingly, most North American respondents indicated that they had digital, mobile and cross-platform strategies in place (see our earlier post on digital innovation).

"Insurers must focus on removing the friction points customers encounter in their interactions if they wish to meet the needs and expectations of their customers. Processes and customer interactions need to be redesigned from the customer’s point of view." — Cindy Forbes, EVP and chief analytics officer, Manulife Financial

Friendly interfaces with high usability go some way toward eliminating friction from customer experience, but the greatest improvement is to be wrought at the back end, by achieving transparency and straight-through processing. The analogy of the retail industry (as it moves toward e-commerce) is once again instructive: What matters to retail customers is not always the absolute speed of their order but often their ability to track its progress. Offering this level of immediate insight to customers – as well as satisfaction – generally requires some level of automation. See also: Global Trend Map No. 9: Distribution   If we take claims as an example, we see that automation does not imply that the whole process is automated across the board, rather that enough is automated to provide clarity on the status of a given claim. Some simple claims will be dealt with automatically, while, for more complex claims, customers can be provided with a working estimate for the resolution time – the key point in each case is the clarity and feeling of control that customers are left with. In our post on claims, we registered a moderate degree of automation among North American respondents, in line with our other regions. In addition to a seamless, zero-friction experience, customers are also demanding personalization, and in the context of insurance this applies first and foremost to range of coverage and premium price. Usage-based insurance (UBI), which we went into in greater depth in our profile on Europe, is a fundamentally new insurance for the new consumer. Formal UBI strategies are only acknowledged by a minority of North American respondents, but this is consistent with our other key regions (for more on UBI, see our earlier posts on Internet of Things and product development). The premise of UBI is that insurers can leverage real data on individuals’ actual usage (for example of a car) to tailor prices and ultimately reward better risk behaviors. The two key ingredients here are data and analytics. Analytics was in fact one of the priority areas that North America led on in our insurer priorities section. A majority of North American insurers also reported increasing their investment in this area, and the salience of the chief analytics officer role in the region has already been noted.

"The whole business understands the value of what analytics can help deliver. In traditional businesses, this seems to mean reports, hundreds of them every month that are mostly rearview mirror. Getting intelligence out of that is what many companies should be focusing on and then making use of it." — Michael Shostak, SVP and chief marketing officer at Economical Insurance

As for data, this is available from a variety of sources. In North America, we find well-established the use of third-party aggregators as a supplement to first-party data, although this data is often neither personal nor in real-time (two key criteria for UBI). The pre-eminent ingress for UBI data must remain IoT, which appears not to be quite as well-established in North America as in our other regions. Although IoT was not ranked highly as a priority in any of our global regions, it came out lowest in North America with a rank of 13th (compared with 10th in Europe and Asia-Pacific). We also suggested in our Internet of Things section that Europe has the lead in terms of platform implementation.

"With connected devices becoming more and more ubiquitous, the availability of data is increasingly a nonissue. The next hurdle for insurance carriers in North America is finding ways to incentivize customers to adopt IoT solutions and part with their personal data – and this requires careful investment in building customer engagement." — Emma Sheard, head of strategy at Insurance Nexus

These measures aside, Applebaum is quick to point out that all the familiar consumer devices that enable IoT in insurance have a presence in the North American market, from in-car telematics to smart-home security and connected-health devices, and he even points out a couple of areas that are well ahead of the curve: "I think IoT is catching up, but there are a couple of specific areas, like water leaks, where it is quickly gaining traction in the U.S. market, both in personal-line and in commercial-line policies," Josefowicz explains. "IoT devices that control water leakage are becoming very popular." Josefowicz points to the strong IoT opportunity for the U.S. market in commercial property and commercial inventory. Applebaum also acknowledges the property opportunity and hints at some of the innovative uses of drones in this area: "Drones, which are also IoT devices, are being used by property and casualty companies to examine property damage after catastrophes and storms, saving them a lot of time and money, so people don’t have to climb up on the roofs, which is dangerous and time-consuming. So drones, water-leak management and of course telematics are prime examples of IoT where there is adoption." Given the strong growth indicators for the next two to three years, it would be foolish to read too much into our depiction of North America as an IoT laggard. Indeed, our stats on IoT platform implementation suggested that our key global markets could be aligned in as little as a year. One extension of IoT that Applebaum flags as a space that insurers are watching closely is autonomous driving. "We will have a situation where people don’t drive cars, where software drives cars and cars don’t have many accidents – but when they do, they are going to be extremely serious and will involve large liabilities," he explains. "There is a lot of IoT left where there is no adoption as of yet, it’s just being developed, it’s emerging, and that would cover all the other 50 billion sensors that are going to be broadcasting data by 2020," Applebaum concludes. Insurers looking to usher in the "new insurance" must, concurrently with expanding their sources of real-time data through IoT, build out their back end so that it can, first, cope with and, second, capitalize on the influx of sensor data; to have the unprecedented volume of data that IoT promises but deficient systems for accommodating it would be like striking oil in a world without refineries. Fundamentally, front end and back end must be developed in synchrony, given the dependencies that each one has on the other, although we believe that organizations may place a different emphasis on them depending on the point they have reached in their transformation. One hypothesis would be that focus on the back end – which is the foundation of the whole transformation effort – is higher at the outset and that, with the passing of time and the steady expansion of capabilities, the C-suite’s strategic focus shifts toward harvesting the rewards at the front end. As we pointed out in the table in our priorities post, North America has a substantial lead over Europe in underwriting (by 19 points), risk management (13 points) and product development (5 points); Europe on the other hand leads North America on Internet of Things (by 11 points), pricing (9 points), digital innovation (5 points), customer-centricity (5 points) and claims (3 points). We feel intuitively that, in the context of emerging UBI models, the priority areas on which Europe leads have more of a front-end flavor, and those on which North America leads more of a back-end flavor. We suggested in our profile on Europe that the North American market might be marginally behind Europe in terms of customer-led disruption, and it is possible that Europe’s front-end overtone reflects this market having progressed marginally further down that path. Whatever the blend, every insurer must juggle early-stage and late-stage initiatives all at once, managing their investments across these tranches like they’d manage any other investment portfolio. "We think it’s very important for insurers to exist in three timelines at the same time," Josefowicz emphasizes. "They have to mitigate the limitations of their legacy systems, they have to address current business needs – short-term, tactical business needs – and then they have to keep an eye on the future in terms of how technology is going to change their business tomorrow." 4. How Insurance Must Set its (Digital) House in Order Standing at the start of the road of digital transformation, incumbent insurers find themselves in an awkward position. In one sense, operating a pre-existing business should represent a headstart over new players. However, their established systems and processes quickly reveal themselves to be less a blessing than a curse, when we consider the rampant dependencies that exist between them. Josefowicz briefly sketches how this becomes problematic for insurers: "The majority of insurers in the U.S. are working with 20th-century systems that didn’t anticipate 21th-century challenges," he explains. "Most of the systems of record or policy-management systems that most insurers have are from the '90s or before, and they didn’t anticipate this level of digital and this level of analytics, so they aren’t necessarily as flexible as they need to be to bring new products to market quickly." It is to the drag of these legacy systems and processes that Applebaum attributes the relative tardiness of the U.S. market, with much of the previous generation of technologies being more entrenched in the U.S. than elsewhere in the world (a good analogy would be with telecoms, whereby cell phones have achieved their highest penetration in precisely those areas where legacy fixed-line infrastructure is missing).

"The CTO or CIO is driving both the ‘cleanup’ of redundant systems and systems that don’t communicate well, but additionally he or she would typically have the responsibility for driving the vision of the future. They need to be finding efficiencies where possible and pinpointing the best investment areas for the future. The CTO must understand the needs of customers, business partners (third parties) and also internal stakeholders such as sales, marketing, actuarial and finance." — Damon Levine, CFA, CRCMP, ERM practitioner, writer and industry speaker

The ideal solution to legacy would be wholesale system replacement but, given that budgets are limited, (re)insurers are more often than not forced into an uneasy coexistence with systems old and new. The overwhelming challenge North American insurers face today – starting with their back office – is to orchestrate the myriad pieces of the transformation jigsaw, keeping cost, time and adverse business impacts to a minimum, and we will see that there are various approaches that they can take. "The last decade has really been insurers struggling to make their 20th-century systems meet 21st century business challenges, and replacing them when they can," Josefowicz says.

"The key considerations for choosing a technology platform include compatibility with existing customer information storage and analysis platforms at your company. Of course, cost and adaptability to a changing data landscape are also of interest. The regulatory landscape, including penalties for data loss, will evolve." — Damon Levine, CFA, CRCMP, ERM Practitioner, Writer & Industry Speaker

See also: Solving Insurtech’s People Challenge   Applebaum observes that digital transformation is overwhelming the resources of most insurers, who simply cannot provide all the pieces of the puzzle in-house, and that this is forcing them to look further afield. "Insurers want to be all things to all people, they want to be available by all channels," he comments. "If they can’t do it internally, for whatever reason – like they’re not fast enough or the skills don’t exist – then they will partner. And if they can’t partner, they’ll buy. But basically, it’s by any means possible." In the longer term, Applebaum believes, many components of the stack, like the management of IoT data streams, will end up as the preserve of large third-party software vendors, which can not only specialize but also operate at a scale far beyond that of even the largest insurance carrier. This will also work out positively in other ways, like from a cybersecurity perspective, because it will shift the liability from the insurer to a third party that can bring to bear a much wider experience with cyber threats. Incidentally, cybersecurity was one of the priority areas on which North America led our other global regions. Alongside legacy, we should draw attention to the regulatory environment – at least in the U.S. – as another hurdle that insurers have to get over in their efforts to innovate: "The regulatory environment in the U.S. is extremely complex, with the insurance industry regulated at the state level, so essentially that’s like operating 50 different insurance companies when you are just one insurance company, because you have to adhere to this never-ending, changing regulatory environment, state by state by state," Applebaum elaborates. "That’s not the case of course in the European markets or in the Asian markets, where country markets are regulated by a single national authority. So that’s a real issue for carriers, and they’re trying to deal with it. It’s expensive, it’s complex and it’s a reality." Josefowicz agrees that regulation will remain a key factor for North American (re)insurers, though he notes that this applies less to the Canadian market, which does not have the 50 separate regulatory regimes on a state level that the U.S. does. While this framework is indeed onerous, requiring insurers to file for the same product in multiple jurisdictions and potentially structure it differently in each one, insurers at least operate on a level playing field with insurtechs in this respect. Indeed, Josefowicz believes that incumbent insurers’ established regulatory competence and compliance may be one area where they can convincingly trump new market entrants: "Most insurance companies that exist are already pretty good at managing the state regulatory process, and in fact they see that as a defensible capability because it’s something that they have a lot of experience in that new entrants struggle with," he says. "And you can see what happened with Zenefits, where they ran afoul of the licensing requirements, as either inexperience or a willingness to disregard regulatory challenges a la Uber, which is much more painful in the financial-services world than it is in the taxi world."

Customer Experience This is a concept that has been and will continue to be written, talked and debated about for years. In our currently connected society, it is imperative that all companies (not just in insurance) find better ways to interact and engage with their customers. There are a few key points when those offering insurance (carriers, agents, brokers, etc.) interact with their prospective clients and policyholders:

• Initial Interaction — What is it like when prospective clients first interact with you? How do they uncover their needs and go through suitability with the person/chatbot/online?
• Purchasing — What is the purchase process like? How are forms filled in?
• Policy Issuance — What is the policy issuance like? How is it ensured that the policy customers purchased and contract they just entered is fully understood?
• Engagement — What sort of interactions does the company have in terms of engaging with policyholders while they are a client?
• Reactive Customer Service — How are the interactions when the policyholder reaches out to the company for non-claims-related issues?
• Claims Process — What is it like to file a claim with the company, and what is the engagement throughout the process of approving/rejecting the claim?

Having an easy way to communicate with customers at these various steps are crucial to creating a successful customer experience. An ideal state would be one in which customers can choose the method in which they prefer to interact with their Insurance provider. This week I cover:

• Three different types of insurance customers
• Different ways to communicate with insurance policyholders
• A solution that incorporates many different tools for customer engagement

See also: How to Collaborate With Insurtechs   Three types of insurance customers Broadly speaking, there are three types of insurance consumers:

1. Self-service — These are people who like to do it themselves. They do all the research themselves (through aggregators, customer reviews, etc.), prefer to purchase their policies online (either through an app or website) and love using AI-powered chatbots in their queries, claims handling and any other matter that comes up.
2. Through someone — These are consumers who prefer to have someone alongside them when they make an insurance purchase or have any queries. They will likely use an agent, broker or financial adviser to help identify the best policy for them and fill in application forms, to call on with any queries/policy changes and to be the first to call when a claim comes up.
3. Hybrid — This is where probably the majority of people fit these days. They may be OK to buy insurance online, but they like to have someone they can refer to for any questions that come up during the process. They may also be OK to file a claim or change policy details themselves and also like the option to do it "through someone" if they so choose.

I don’t see these three buckets changing for a long, long time (though the percentage of people who fall into each one may shift). As such, it is important that insurance carriers know their current and future customers to build an experience that will best engage with them. Different ways to communicate with policyholders There are numerous ways that insurance carriers and agents can communicate with their prospects and policyholders. The traditional ways are via:

• Email
• Phone – for purposes of this article, I will call this Voice 1.0, including calls between agents and customers as well as call centers (including interactive voice response (IVR))
• Text – this has some challenges, especially between agents and customers due to the fact that they are not secure/non-trackable (something that companies like Eltropy solve for)
• Post (i.e. snail mail)

The newer ways include:

• Live Chat — Something that has been around for some time and that we are seeing provide very interesting progress for a variety of industries.
• Video — For the same reasons as text, video was not as prominent due to the lack of security/auditability around it, but we have seen this starting to expand in banking as well as the insurance claims process, with companies like DropIn Inc.
• Voice 2.0 — Think Alexa and Google Home. Coverager has done a summary of the insurance carriers that are currently offering Voice 2.0 solutions for their customers. Expect the functionalities and list of companies to grow as these tools become more popular.
• Chatbots — This has to be one of the most common and overused terms within our industry over the past couple of years (I am also guilty of it!). Many carriers felt that they were at a massive disadvantage if they didn’t have one (even if they fully didn’t understand what it meant to have one!).

This article by Richard Smullen, CEO and founder of Pypestream, pours some cold water on the term "chatbot" and ends with something that also explains the feelings I had when writing this article: "If I had one wish for this industry, it would be that we get rid of the term 'chatbot' and instead call this user interface built around conversations a CI, or conversational interface." A solution that incorporates many different tools for customer engagement A few weeks ago, I experienced a string of customer service failures. I won’t mention the companies they were with, but one was with an insurance company, one was with a big tech firm and the last was with a flower company (I had some delivery issues with some flowers that I ordered for my girlfriend). These experiences, especially the one with the insurance company, had me thinking about what tools could have been in place to make the overall experience better. Just days later, I was fortunate to meet the co-founders of SaleMove, Dan Michaeliand Justin DiPietro. They describe their solution as a digital-first, omnichannel platform and have built three solutions that can be used together or separately, depending on their client’s choosing (the platform is currently being used by many top-tier banks and insurance companies): OmniCore — a complete omnichannel digital solution that offers live phone (voice 1.0), live chat and live video in the solution. For carriers and agencies looking to engage with their customers digitally, while having the power of a human behind it, this has it all. OmniBrowse — a great solution for front-line agents and call center employees. This solution allows a co-browsing solution to enable employees to have context of what their customers are viewing. One thing that frustrated me so much with the customer services failures I had above was that the person I was speaking to in the call center (with the exception of the big tech company) could not see what my actual problem was. At a bare minimum, if your call center personnel do not have co-browsing capabilities for your online platforms (whether it be purchasing sites or customer web portals), you are living in the stone age. OmniGuide — has incorporated AI into the solution, but not exactly in the way we see many chatbots out there today. This solution provides agents and call center personnel with AI-assisted responses to the customers they are chatting with, that they can accept, amend or discard. This solution rapidly increases the response time to consumers. If incorporated with OmniCore, it also gives the customer the ability to jump on a call with the human behind the chat in a matter of seconds. See also: Where Will Unicorn of Insurtech Appear?   SaleMove integrates onto a company’s website, through a single line of code, with no changes to the website required, and customers do not need to download or install anything on their end to be able to use the SaleMove platform. Video chatting or co-browsing with an agent is seamless. Please see a demo of this in the video below. Please note that the video is simply a demo and that SaleMove Insurance Agency is not an actual insurance agency. Also, I’m not so naive about my property that this was my first experience in acting. Summary Michael Dell was once quoted as saying, “Our business is about technology, yes. But it’s also about operations and customer relationships.” When I first started as a financial adviser in 2006, my boss came in to my office while seeing me on the phone making cold calls and said "Get out of the office…this business is built on belly-to-belly conversations with people, and, if you aren’t out there meeting people, you’re never going to get business." Both gentlemen are right. We are social creatures at heart, and my strong belief is that relationships are built on human-to-human interaction. This is why I currently and will always feel that an agent will be relevant in the years to come. Technology helps to enable and enhance the relationship-building process, and a hybrid model (one that has technology tools to engage with customers and humans available when customers want it) will likely be the winning solution. For organizations looking at upgrading/enhancing/introducing engagement solutions, they need to think about two things:

1. What communication problem are we trying to fix?
2. What is the preferred method for our customers (either policyholders or internal employees).

They should then build a solution based on the answers. One of my fellow insurtech enthusiasts, Patrick Kelahan, keeps using a great line in many of his LinkedIn posts  It’s, "innovate from the customer backward." Instead of finding a cool, new, emerging technology and trying to implement it in hopes of being more innovative and engaging – figure out what your customers want and need and then find the solution that best fits.